Thursday, 15 September 2016

Understanding the CBN’s flexible exchange rate


Written by the Editorial Board of The Guardian Newspaper

Although it was touted by the Central Bank of Nigeria as the product of wide consultation and careful preparation, the formally styled Flexible Exchange Rate Interbank Market (FERIM) dashed public expectation from the word go. Inflationary pressure with its accompaniments has further worsened in the wake of the very sharp depreciation of the naira. Notwithstanding knowledge that parallel lines do not meet, FERIM like its predecessors plays up the so-called parallel market exchange rate as the reference rate to be matched or merged. But matter-of-factly, elements desperate enough to patronise the parallel forex market should be left to their choice whereas the monetary authority has the duty to ensure a stable and realistic exchange rate to facilitate optimal economic activity.

However, such a FERIM outcome has been thwarted and will continue to be frustrated by several corrupt vested interests that are at work. Firstly, the CBN trespassingly acts as a firsthand or primary forex seller and wrongly collects commission from deposit money banks (DMBs) which Federation Account beneficiaries should actually pay to the DMBs. In that reversed role, the apex bank surrenders the country’s external reserves to middleman-trader DMBs that “shall be required to resell a minimum of 70% of any uptake from CBN in the interbank market on the day of purchase.” By implication, as apparent compensation for the commission stolen by CBN, DMBs have been given free rein to overstate forex volume needed (which induces a more depressed naira value than otherwise) in order to acquire the extra 30% volume for later resale. And to make a killing, DMBs proceed to set a price that further depreciates the national currency. On the contrary, a central bank’s intervention role in a forex market should only occur as a last resort for the purpose of buying up at a lower or the market-determined rate surplus forex to boost the external reserves or to sell at a premium part of the external reserves to reimburse forex shortfall.

Secondly, by adopting “no predetermined spread on forex spot and forex forward” sales on the FERIM, the CBN signifies indifference to imposition by DMBs of extortionate charges on forex end-users. Little wonder forex sales are the main source of bank earnings at the expense of competitive domestic production. However, under best practice, banks as intermediators are to the forex market what stockbrokerage firms are to the stock market. Therefore, DMBs should earn a predetermined commission on forex transactions as indeed was the case in the 1970s.

Thirdly, bureaux de change (BDCs) are meant to buy forex from small holders and tourists for resale to banks and small end-users. But in July the CBN resurrected the ruinous flow of forex in the opposite direction by directing DMBs to sell forex cash accruing from inward money remittances to BDCs. At $50,000 per BDC per week, $7.2 billion scarce forex would drain to the 2,786 BDCs (January 2016) for sale for specific transactions of Business/Personal Travel Allowance, Overseas School and Medical Fees. Such BDC customers must present Bank Verification Numbers as bank account operators. Like DMBs, the BDCs disregard the rules and charge their customers as they please. So, except for the purpose of releasing forex in the banking system to the well-connected rentier BDC owners for unconscionable corrupt enrichment through reckless parallel market rates, DMBs are best placed and equipped to handle the stated forex transactions. Therefore, as in focused economies, BDCs should be restricted to their normal role.

Fourthly, while the financial sector and its players feather their nests as sketched above, envious yet-to-be-gorged members of the organised private sector (OPS) that are being seared by the FERIM rates have demanded concessionary exchange and interest rates in addition to their long-stated request for preferential allocation of forex. As camaraderie, the CBN directed DMBs to devote 60% of forex at their disposal to imports of “plant, machinery and raw material.” There is no action yet regarding the burden of high interest rate. However, it is not clear if manufacturers will purchase the 60% forex at whatever is the going FERIM rate or at concessionary rate that could emerge from the 60% forex/demand situation. In any case, will the anticipated manufactures enjoy effective demand while the populace chokes under FERIM and parallel market exchange rates? Clearly, the option of granting sector-by-sector forex allocations and exchange rates in not viable.

Fifthly, the willfully unaddressed root cause of the unrealistic FERIM rate involves the entrenched dual currency system by way of dollarisation in the banking sector. It is imperative to put an end to the injurious dollarisation by the FG and the OPS as follows: one, the NNPC dollar deposits in DMBs exemplify FG culpability in dollarisation of the banking sector. FG naira and foreign currency revenue should always be transferred to the Treasury Single Account domiciled in the CBN within the shortest possible time. Recently, the apex bank temporarily barred eight banks from the forex market pending the remittances to the TSA of $1.8 billion outstanding NNPC deposits. (Why, while the ban lasted, were interested customers of those banks through no fault of theirs, vicariously denied the opportunity to bid for and access forex for their legitimate business pursuit)? The plan to remit the outstanding funds in dollars that was struck between the CBN and the banks unnecessarily protracts dollarization by the FG. Since the outstanding $1.8 billion belongs to Federation Account beneficiaries that are currently paid naira amounts and because “the banks have the naira equivalent of the outstanding amount”, the debtor banks should immediately remit the naira equivalent to the TSA. Case closed!

Additionally, the CBN should take the all-important step to excise the cancerous tumour of dollarisation of the banking sector. Not being forex seller of the first instance, the apex bank should begin to disburse FA dollar allocations in a secure form for the beneficiaries to sell as and when required via the DMBs as indicated earlier. This very step will end the excess liquidity-spewing substituted CBN deficit financing of withheld FA forex allocations with its attendant economic problems. Going forward, CBN should hand over the so-called CBN external reserves to the FG, the rightful and constitutional owner.

Two, banking sector dollarisation by the OPS takes the form of operating permanent domiciliary dollar accounts (DDAs). Holders of a part of the country’s forex inflows termed collectively as national export earnings amounting to $20 billion or so being kept in DDAs commanded N3.9 trillion at the exchange rate of N197/$1 on the eve of the takeoff of the FERIM. For instance, by August 18, 2016 at the FERIM rate of N324.50/$1 and without exporting additional goods and services, the DDA holders had claim to the unearned wealth of N6.5 trillion just as they were sheltered from the impoverishment that FERIM had inflicted on the populace. The OPS along with its think tank of Nigerian Economic Summit Group will completely agree that Nigeria runs only one economy with a single banking sector and so the OPS cannot eat its cake and have it.

The redeeming solution? The FG and OPS should abide by our naira legal tender jurisdiction explicitly proclaimed under the CBN Act 2007, which supersedes the Foreign Exchange Act 1995. Thereupon hinges the cast-iron rule preventing public and private sector foreign currency inflows irrespective of their source from being left in the hands of DMBs long enough to be “dollarisedly given out for loans and other investment purposes.” Meanwhile, to repair and regularise the system, as this newspaper has untiringly canvassed, forex funds in the DDAs should be immediately converted to naira amounts, for the sake of equity, at the pre-FERIM exchange rate and the forex transferred to augment the FG-owned external reserves earlier indicated. That offers the guarantee of dollar liquidity.

And lest the CBN begins to quake and equivocate over liquidity in the banking system arising from the above recommendations, any resultant excess liquidity can and should be tackled with appropriate level of cash reserve and liquidity ratios and direct mop-up at nominal interest rate of not more than 0.01 per cent.

And literally in a jiffy, given a tranquil political order, the country will experience a stable and realistic naira exchange rate; a conducive production environment will prevail; and there will be across-the-board mid-single digit interest bank credit for investors with DMBs deriving the bulk of their earnings from loans extended to the private sector thenceforward. In fine, existing laws confer the wherewithal to fix the current economic mess on the president. Buhari should implement the laws, pure and simple.

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